3 Ways to Pay Off Student Loan Debt

Get a finance expert's advice on tacking the money you owe

By MP Dunleavey

In trying to get the education that would earn her a good living, Kelly LeGendre, 35, did what many people with no savings and no family support often do: She borrowed the bulk of what she needed. Each decision—first to leave college to pursue a master's degree in acupuncture, then to re-enroll to get her bachelor's degree—seemed logical to her when she made it, but somehow, over nine years, Kelly borrowed a total of $160,000. "I never thought I would end up here," she says.

Today, Kelly is at home with her infant son but feeling bleak about money. Husband David, who she marriedd in 2011, is supportive (he knew how much she owed when they got together) but he doesn't want to take responsibility for her debt, which Kelly understands. He earns a good income (about $80,000), and Kelly is grateful that he can provide for them. "But even if I get a job and repay my loans, it's going to take years to pay off all this debt. I feel like I'll never get out from under it," she says.

HOW THIS HAPPENED

Like many college students, Kelly took out loans (at first about $10,000) to pay her tuition. But after five semesters, Kelly fell into a deep depression. "It was really bad," she says. The only treatment that helped was acupuncture. Indeed, she was so impressed by the results that in 2003, she decided to become an acupuncturist herself.

She didn't need a B.A. to enroll in a four-year master's program at a school for Chinese medicine near her, so she left college and borrowed $40,000 for tuition. The program was demanding, Kelly says, so she couldn't work, and borrowed $60,000 for living expenses. "But we were told that we'd be making six figures within a year or two of graduating," she says. "I didn't think it would be hard to pay off the loans."

Only after she'd gotten her master's and was struggling to find clients did Kelly learn how truly hard it is to run a profitable business. In 2007, Kelly looked for a job, but then the recession hit, and without a B.A., she couldn't get hired. "I thought it wouldn't matter because I had my master's," she says ruefully. But it did.

Desperate, Kelly returned to college for her B.A., borrowing around $25,000 more for tuition. When she graduated, she got an office job and began paying off her loans.

But Kelly wanted to get back to acupuncture. After she and David married, they lived primarily on his income while she opened a community clinic. After two months, she became pregnant, and closed the business when her son was three months old. "I didn't realize how much being pregnant would slow me down," she says.

HOW TO FIX IT

Kelly is hardly alone in owing a mind-blowing amount. Default rates have risen to their highest levels since 1995, thanks to 18% un- and underemployment among new grads. About 15% walk away from their loans within three years. Kelly does not want to default, and declaring bankruptcy rarely discharges student loan debt. So what's next? Kelly and I ran through three possibilities:

Work for forgiveness

The federal Public Service Loan Forgiveness Program is one option. If Kelly were working in, say, public health or education, and made 120 on-time payments (about 10 years' worth), the balance of her qualified federal loans would be forgiven. The wages may be low (she'd probably make around $25,000 a year, about $15,000 less than in the private sector) and public sector work can be difficult, but Kelly could consider the forgiveness as part of her salary. If she went this route, she'd likely be off the hook for some $100,000 of her loans.

Apply for IBR

Kelly did, and has been accepted into the federal income-based repayment plan (IBR). Because her individual income was near zero in 2013, she pays very little this year. And if she remains in the program for 25 years, the rest of her qualified debt is forgiven.

But this is only a short-term solution. To qualify each year, she must keep her income relatively low. Since she's an overwhelmed new mom, it's good to have the option, but I'm confident that someone as smart as Kelly will use this "time off" from her loans to come up with a plan enabling her to live up to her earning potential.

Live on one income

This is the most aggressive choice, and my preference: Kelly could get another office job (her last one paid $40,000) and put her whole paycheck toward her loans. Even with childcare costs, she could make a dent in her debt sooner.

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